Tuesday, 26 October 2010

The Astakos Debacle and Need for a Real Investment Strategy for Greece

The Astakos LPG/LNG debacle and the government’s spasmodic efforts to pass a “Fast Track” legislation indicate that Greece’s (or rather, PASOK’s) strategy for attracting and facilitating investments remains fatally flawed. This blog post will explore the Astakos investment as an illustration of the general problem: a later post will explore the problems and potential of investment policy in Greece as a whole.

The Astakos investment was announced by the government with great fanfare in late 2009/early 2010, and promptly handed over for negotiation by the then Minister-without-Portfolio Haris Pamboukis. There followed a constantly-changing investment plan and investment consortium which included the following elements:

·Development of a liquefied petroleum gas (LPG) and partial liquefied natural gas (LNG) power station at the port of Astakos. Additional infrastructure included an LNG terminal and a pipeline linking Astakos with the Turkey-Greece-Italy IGI Poseidonpipeline, which passes through northern Greece and enters the Ionian Sea south of Igoumenitsa.

·The capacity estimate was for a 1,010 MW power station which would distribute power in Greece, while further capacity (estimated at 30% total output) would be sold to Italy. The total investment value was listed at $ 7 bln.

·The investment consortium* included the Quatar Investment Authority and Qatar Petroleum with 34%; Sabbagh and Khoury (Lebanon) with 33%; and Rosebud Energy (Germany) with 33%.

A rapid glance at Greece’s geography and the site of the proposed investment underlines the unclear business logic of the project:

1.Astakos is geographically-isolated. The nearest major urban centres are Preveza to the north, Agrinio to the east, and Nafplio and Patras to the southeast. Connection to the grid would have been required, together with a careful capacity planning. In any event, the Ministry of Energy indicated that at this point in the system, the grid could only absorb 300 MW. There are therefore two commercial risks to consider:

a.The direct risk, i.e. the cost of investing in transmission and distribution grids, and

b.The indirect risk, i.e. the fact that the power generation and distribution system in Greece is heavily regulated and dominated by a monopoly player, the Public Power Corporation of Greece (ΔΕΗ).

2.To say that Astakos is isolated is perhaps to underestimate the actual situation. The port of Astakos (which is not in Astakos town) has only a small rural road connecting it to the national highway system. There is no infrastructure around the site. The region does not have the engineering and skilled worker capacity necessary to run the site: staff would have to be attracted to the location, and living quarters built. The situation in Greece as regards labour costs, payroll taxes and work/residence visa issue is not the same as Qatar and the United Arab Emirates, which are far more flexible and investor-friendly in this regard.

3.Astakos is far from the IGI connector, which enters the Ionian Sea south of Igoumenitsa. Investing to connect to the IGI, given the minor quantities of gas available in the initial plan, requires a very careful planning of costs and benefits. If I were planning an investment designed to supply Italy with natural gas via the IGI, it would not be located in Astakos.

4.The ostensible reason for the withdrawal of the Qatari partners from the project—that the price of electricity offered by Italy was too low—is a direct consequence of the size of the investment costs and the capacity planning. Taking into account the costs of seaborne LPG or LNG, there is little commercial sense in setting up a small storage unit at Astakos, and investing in an expensive pipeline to connect with IGI. It makes far more sense to locate the LGP/LNG terminal directly in Italy, and indeed, further north, where demand is higher. (The marginal cost of transport by sea 200-300 km further north is far lower than the cost of building pipelines for this reason). Alternatively, the terminal could be located at Otranto to offset a potential fall in supplies through IGI.

5.Taking into account the energy demand of Greece, it is difficult to see why such an investment should not be made in the region of Elefsina, where an extensive energy cluster already exists, and where major demand and infrastructure (between Athens and Corinth) already exist. Alternatively, the station could have been located in northern Greece, which would enable Greece of offset energy imports from Bulgaria with domestically-produced energy.

6.The choice of partners is an interesting point for any investor interested in doing business in Greece. The dominant player in the energy sector in Greece is the Public Power Corporation, with the Public Gas Corporation of Greece (ΔΕΠΑ) being the primary player in gas production and distribution. Although the energy sector has theoretically been liberalised, in practice it has not. Any investment generating 1,010 MW of energy for consumption in Greece would be a direct competitor to PPC’s powerful, entrenched interests, which include lignite-fired plants in northern Greece. Given that PPC controls both production and distribution of electricity, any investor would have to seriously consider the political resistance which would likely be created by these interests.

The fact that PPC is in the process of privatisation / liberalisation, and the very real political conflict which is now underway, illustrated the danger posed by such a competitor, particularly since the Minister of Energy is also the Minster of Environment in Greece. A natural choice to offset this resistance would be a powerful local player such as the Vardinogiannis group, which already has extensive energy interests and is perhaps the only partner capable of withstanding the tangled political interests of the governing party. The logic and ulterior motives of choosing Rosebud as an investment partner should be questioned.

7.The choice of LPG as a feedstock is a controversial choice. Given that natural gas is in general cheaper and that Qatar has the largest LNG production capacity in the world, it is difficult to see what advantages are offered by LPG. This is further open to question given that Greece has already invested in gas distribution capacity and that an LNG plant would be more in line with the national energy policy.

To conclude: it is difficult to determine the commercial and business logic of this investment, given the peculiarities of the Greek investment climate, the Greek energy mix and the location of the investment.

The fact that an investment site was readily available and had to be marketed to a potential bidder is no substitute for the classic investment budgeting for any greenfield site. The costs of land, in any case, are a small fraction of the investment in pipelines and grid that would have had to be made for this project to function effectively.

This difficult situation was, in my opinion, compounded by the unhealthy government involvement in its development. It was clear that the reason the Greek government was promoting the project was to develop a troublesome “asset” which was started under previous PASOK governments, and to “win” a battle of public opinion. The involvement of different ministries, and the involvement of ministers with vastly different priorities, resulted in conflicting messages and estimates. A kind of “personal investment promotion” occurred, which cannot possibly substitute for carefully-planned, economically-logical strategies and plans.

The culmination of this exercise was the sudden and embarrassing withdrawal of the Qatari partners and the collapse of the project. The attempts by PASOK to cast the blame on the investment consortium are, in retrospect, suspect, since the commercial logic of the project was being promoted by PASOK in the 9-10 previous months.

It is also interesting to note that any number of actors, including both the government and private sector players, have served as active cheerleaders of the project, before the investment even took place. I was particularly struck by the statement of Michael Massourakis, Chief Economist of Alpha Bank, in the FT on October 12th:

Judging from the dust the Qataris and the Chinese leave behind as they scramble to invest in Greece, as well as the more than €20bn in European Community structural funds in the pipeline, a resurgence of investment may not be such a far-fetched scenario.

Alpha Bank is one of the owners of the AstakosPort, and is particularly exposed to Greek public debt. As if this conflict of interest were not enough, any objective evaluation of Chinese investments in Greece to date, or of EU fund absorption and effectiveness, should be enough to convince an observer of the opposite conclusion.

I forecast the same type of fundamental conflict of interest in the ongoing $ 5.0 bln MOU for Qatari government investments in Greece. This project is being planned by committee, with the Qatari and Greek sides each putting up members. While I do not want to sound unduly pessimistic, it is difficult to see how committee staffed by political appointees of PASOK (or indeed, any political party) is expected to lead to sustainable investments for the objective benefit of Greece.

Where are the investment professionals? Where is the long-term investment planning designed to generate jobs and improve the trade balance? Why such focus on large-scale investments (FastTrack), when research from every EU country (and the United States) indicates that small and medium-enteprises produce the large majority of employment and economic benefits?

Greece needs a far different kind of investment policy. In a subsequent blog post, I will try to outline what this should look like.

* NB My company, Navigator Consulting Group Ltd., is a consultant to one of these investors. The opinions expressed in this post are my own. Neither Navigator nor I have advised the principals in the Astakos project.

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